Geoff Yu at BNY highlights that Canadian Dollar (CAD) dynamics differ from the U.S., with equity-based rebalancing pointing toward CAD support as growth and allocation trends move opposite to the US Dollar. Fixed income steepening and poor CAD performance are seen amplifying CAD buying signals, suggesting some relief for the Canadian Dollar into month-end.
Canadian Dollar supported by flows
“Mathematically, our figures suggest that the unwinding of USD/CAD hedges – the discontinuation of forward USD selling against CAD on U.S. positions – played a big role in the dollar’s performance and some reversion is needed.”
“The only other equity-based rebalancing signal is in the CAD, where growth and asset allocation trends are pointing in the opposite direction.”
“In contrast, CAD buying is being amplified by similar steepening in bond markets on top of poor currency performance.”
“USD and CAD have again generated the same net selling and buying signals, though the dollar’s signal is far weaker, as poor bond performance offset dollar purchases. In contrast, CAD buying is being amplified by similar steepening in bond markets on top of poor currency performance.”
The British Pound recovers almost half of its early losses against the US Dollar.
Middle East tensions re-escalate due to the exchange of attacks between the US and Iran.
10-year UK gilt yields have remained lower in the past few weeks due to easing hawkish BoE bets.
The British Pound claws back half of its early losses and rebounds to near 1.3400 against the US Dollar (USD) during the European trading session on Thursday from the intraday low of 1.3367. The recovery move in the GBP/USD pair appears to be short-lived as Middle East conflicts have re-escalated.
At press time, S&P 500 futures and Asian stock markets have also recovered significantly. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, retreats from its intraday high of 99.54, but is still 0.18% higher to near 99.40. A slight correction in the WTI Oil price has also been observed from the day’s high of $91.17 to near $90.14.
Geopolitical tensions in the Gulf region have been reignited due to the exchange of attacks between the United States (US) and Iran. Earlier in the day, Iran’s Islamic Revolutionary Guard Corps (IRGC) said that it attacked US military bases in retaliation against Washington’s strikes near Bandar Abbas airport.
This was the second attack by the US this week after the so-called “defensive strikes” on Iranian boats deploying mines and their missile launching sites.
Meanwhile, United Kingdom (UK) gilt yields have also recovered strongly after a weak opening due to Middle East concerns. 10-year UK gilt yields have rebounded to near 4.87% from the day’s low of 4.81%.
UK gilt yields have been declining in the past few weeks due to easing hopes of a near-term Bank of England (BoE) interest rate hike. Traders have pared hawkish BoE bets lately due to weakening job market conditions and lower household spending.
The New Zealand Dollar faces selling pressure after the NZ budget 2026 announcement.
On Wednesday, the RBNZ held its OCR steady at 2.25%, but guided a hawkish monetary policy outlook.
Renewed concerns over the US-Iran deal have underpinned the US Dollar.
The New Zealand Dollar (NZD) drops to near 0.5883 against the US Dollar (USD) during the Asian trading session on Thursday, following the New Zealand (NZ) budget 2026 announcement. The Kiwi pair edges down even as the nations’ Debt Management Office (DMO) has reduced its gross bond issuance plans for four years to June 30, 2030 to NZ$124 billion from NZ$130 billion forecasted in December, which diminishes fears of widening fiscal concerns.
For the current year, DMO’s plans to issue NZ$34 billion worth of bonds remain unchanged with the December forecast.
However, the broader outlook of the antipodean has improved as prospects of the Reserve Bank of New Zealand (RBNZ) raising interest rates in the July meeting have increased after a “hawkish hold” on Wednesday.
Markets quickly nudged up the probability of a quarter-point increase in July to around 75%, and saw rates reaching 3.0% by year’s end, Reuters report.
On Wednesday, the RBNZ left its Official Cash Rate (OCR) steady at 2.25%, as expected, but expressed the need to tighten monetary conditions amid rising inflation. “Committee sees inflationary pressures going forward, agrees cash rate needs to be higher going forward,” RBNZ Governor Anna Breman said.
Meanwhile, the US Dollar trades sharply higher on renewed concerns regarding the dismissal of the United States (US)-Iran negotiations. As of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.2% higher to near 99.40.
GBP/USD loses momentum to around 1.3400 in Thursday’s early Asian session.
US military carried out new strikes in Iran; Trump said he won’t rush into a deal with Tehran.
Traders reduce their bets on BoE rate hikes due to easing concerns about political developments and softer UK data.
The GBP/USD pair attracts some sellers near 1.3400 during the Asian trading hours on Thursday. The British Pound (GBP) weakens against the US Dollar (USD) on fresh geopolitical developments. Markets remain cautious ahead of the release of the US April Personal Consumption Expenditures (PCE) Price Index inflation report, which is due later in the day.
The US military carried out new strikes in Iran, targeting a site that posed a threat to US forces and commercial traffic, according to Reuters. The US described the actions as measured, purely defensive, and intended to maintain the ceasefire.
On Wednesday, President Donald Trump vowed to reach a favorable deal to end the war with Iran, warning that the regime’s efforts to bore him with waiting will not work because “I don’t care about the midterm elections.” Rising tensions and signs of a prolonged conflict in the Middle East could boost a safe-haven currency such as the Greenback and create a headwind for the major pair in the near term.
Markets have scaled back expectations for a rate hike from the Bank of England (BoE) following softer inflation data, an unexpected rise in the Unemployment Rate to 5.0% for April, and easing political concerns.
“Traders now price one rate hike fewer in 2026 than at the end of the previous week, and gilt yields saw the biggest weekly drop since late-2023,” Pantheon Macroeconomics said in a note on Tuesday. “We estimate that lower yields were driven by lower oil prices, a fall in betting-market odds on Sir Keir Starmer being replaced, and Andy Burnham committing to maintain current fiscal rules,” they added.
USD/JPY attracts buyers for the third straight day, though JPY intervention fears cap gains.
Economic concerns stemming from Hormuz risk undermine the JPY and support spot prices.
Mideast tensions and Fed rate hike bets benefit the USD ahead of the crucial US macro data.
The USD/JPY pair trades with a positive bias for the third straight day and touches a four-week high, around the 159.60 region, during the Asian session on Thursday. The Japanese Yen (JPY) continues with its relative underperformance amid economic concerns stemming from the ongoing Middle East conflict. This, along with a broadly firmer US Dollar (USD), acts as a tailwind for spot prices, though intervention fears might cap further gains ahead of important US macro releases.
Investors remain worried that Japan’s economy will come under substantial strain due to the continued disruption to energy supplies through the Strait of Hormuz. In fact, shipping traffic through the strategic waterway has drastically reduced since the start of the Middle East conflict due to Iran’s restrictions on movements and the US naval blockade of Iranian ports. Adding to this, renewed US strikes on Iran raise the risk of a further escalation of tensions in the region, which continues to undermine the JPY and supports the USD/JPY pair.
A US official told Reuters that the US military carried out fresh strikes in Iran on Wednesday, targeting a military site that posed a threat to American forces and commercial maritime traffic in the Strait of Hormuz. The US official also said American forces intercepted and shot down multiple Iranian drones that posed a similar threat. Moreover, US President Donald Trump said that he is not satisfied with the terms negotiated with Iran and that he won’t be rushed into a deal, dampening hopes for a diplomatic solution to end a three-month-old war.
The latest developments, in turn, underpin the Greenback’s reserve currency status amid bets that the US Federal Reserve (Fed) will hike interest rates in 2026 amid inflationary concerns and further supports the USD/JPY pair. The JPY bears, however, seem hesitant amid speculations that Japanese authorities will step in again to prop up the domestic currency. Furthermore, traders might opt to move to the sidelines ahead of the release of the US Personal Consumption Expenditures (PCE) Price Index and the Preliminary US GDP report later today.
The pound held steady at $1.344 as investors awaited Middle East developments amid optimism over a potential US-Iran peace deal and diminishing expectations for Bank of England rate hikes. Investors remain focused on the region, heartened by the recent lack of negative signals from both sides and lingering hopes that an agreement to ease tensions and reopen the Strait of Hormuz remains possible despite recent strikes. Traders have trimmed their bets on BoE rate hikes, now expecting about 40 basis points of tightening by year-end, with a roughly 50% chance of a hike next month. Attention now turns to upcoming BoE policymaker speeches for monetary policy signals and political developments around Prime Minister Keir Starmer following Labour’s regional election setbacks.
RBNZ: hawkish hold The RBNZ delivered a decision that the market interpreted as a classic “hawkish hold.” The Official Cash Rate (OCR) was kept unchanged at 2.25% , but only after a rare 3–3 split within the Monetary Policy Committee. Governor Anna Breman, Karen Silk, and Paul Conway voted to keep rates unchanged, while Carl Hansen, Hayley Gourley, and Prasanna Gai supported an immediate 25 bp hike to 2.50% . Breman’s deciding vote left policy unchanged, but the broader message was clear: the easing phase is over, and the next move will be upward. The RBNZ explicitly stated that the OCR will need to rise sooner and by more than the bank expected as recently as February. A more challenging macroeconomic environment The macroeconomic backdrop has become significantly more complicated. The central bank is now dealing with a negative supply shock stemming from the Middle East conflict — primarily through higher oil, gas, and petrochemical prices — while domestic demand is already beginning to weaken. Inflation is now expected to peak at 4.3% in Q3 2026 , with a return to the 2% inflation target not expected until mid- 2027 . At the same time, business and consumer sentiment indicators, housing market activity, and corporate hiring plans have all deteriorated. In practice, this means that the RBNZ is facing a difficult combination of factors:
inflation risks are clearly higher, especially if firms and workers begin treating the energy shock as permanent;
growth risks are clearly lower, as higher fuel costs reduce real incomes, margins, and consumption;
spare capacity and elevated unemployment should partially limit second-round effects, but not enough for the bank to ignore the risk of inflation becoming entrenched.
Implications for investors The key takeaway for investors is that the decision was not dovish despite rates being left unchanged. All six MPC members agreed that rate hikes at upcoming meetings will likely be necessary to prevent short-term inflation from feeding into medium-term inflation expectations. The updated rate path points to a significantly more restrictive stance in the future, and market commentary suggests a high probability of hikes at the July, September, and October meetings. New Zealand dollar reaction The New Zealand dollar reacted with gains. The market focused more on the hawkish forward guidance than on the hold itself. NZDUSD rose 0.70% toward the 0.5870 area following the decision release. Such a reaction is logical: the split vote, higher OCR path, and clear suggestion that hikes are likely later this year support the currency through expectations of wider interest rate differentials. At the same time, the upside potential may not be one-directional. The same statement also emphasized weaker domestic growth, fragile economic sentiment, and risks to activity, while the RBNZ itself pointed to high volatility in the trade-weighted NZD exchange rate.
The Indian Rupee ticks higher against the US Dollar as oil prices decline.
Iran alleges that the US is violating the ceasefire.
FIIs turned out to be net sellers on Tuesday, offloading the stake worth Rs. 2,407.87 crore.
The Indian Rupee (INR) trades marginally higher against the US Dollar (USD) in the opening session on Wednesday. The USD/INR pair ticks lower to near 95.70 as oil prices fail to hold their Tuesday’s recovery move, with market participants remaining confident that the United States (US) and Iran are close to reaching a deal.
At press time, the WTI Oil price trades 1.8% lower to near $90.80. Currencies from economies, such as India, which rely heavily on oil imports to meet their energy needs, attract bids following a sharp correction in oil prices.
US-Iran negotiations continue despite US defensive attacks on Iran
On Tuesday, Iran’s Islamic Revolutionary Guard Corps (IRGC) threatened retaliation after the US carried out strikes on southern Iran, which were described as “self-defense” by the US Central Command. The Iranian Foreign Ministry condemned the US attacks, calling them a “gross violation” of the ceasefire.
However, negotiations between the US and Iran regarding an end to the Middle East war and the reopening of the Strait of Hormuz, a vital passage to almost 20% of global energy supply, continue through mediators.
An Iranian official said on Tuesday that the unfreezing of Iran’s funds is the last serious sticking point with the United States (US) being resolved through Qatar mediation, Fars agency reported. However, there had been no official confirmation.
Earlier this week, US Secretary of State Marco Rubio said that the Strait of Hormuz has to be open “one way or the other,” and finalizing the deal with Iran may take a few days.
FIIs remained net sellers on Tuesday
There seems to be a mixed sentiment of Foreign Institutional Investors (FIIs) toward the Indian stock market the entire month. Overseas investors have been seen turning out net sellers on alternative days, with no clear pattern. On Tuesday, FIIs offloaded their stake worth Rs. 2,407.87 crore after increasing by Rs. 821.75 crore on Monday.
US Dollar wobbles ahead of US PCE Inflation data
The US Dollar trades in a tight range around 99.00 as investors await clear signals from the US and Iran regarding the progress in negotiations toward a permanent deal.
On the domestic front, investors await the US Personal Consumption Expenditure Price Index (PCE) data for April, which will be released on Thursday. Investors will pay close attention to the US PCE inflation data to get fresh cues on the Federal Reserve’s (Fed) monetary policy outlook.
The US core PCE inflation – which is the Fed’s preferred inflation gauge – is estimated to have grown at an annualized pace of 3.3%, faster than 3.2% in March, with monthly figures growing steadily by 0.3%.
Technical Analysis: USD/INR attracts bids near 20-day EMA
USD/INR trades slightly lower at around 95.70 as of writing. The pair holds a constructive bullish bias as spot remains above the 20-period Exponential Moving Average (EMA) at 95.4387.
The EMA’s upward slope hints that the recent advance is still supported, while the Relative Strength Index (RSI) near 56 suggests positive but not overbought momentum, allowing room for further gains if buyers stay in control.
On the downside, initial support is located at the 20-day EMA around 95.44, where a break would signal fading short-term momentum and expose a deeper corrective move towards 95.00. Looking up, the pair would attempt to return to the all-time high around 97.00 if it manages to recover above the May 22 high at 96.37.
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